BT has bought TalkTalk's consumer business and its wholesale arm, PlatformX, out of administration. It takes on no debt, and expects the total cash cost this financial year to be around £400mn.
The deal adds 1.5mn retail customers and 1mn wholesale customers. TalkTalk made revenue of around £1.2bn over the last 12 months but lost money. BT expects the deal to add value over time as the business is stabilised and cost savings come through.
Regulators are expected to review the deal over the coming weeks. Until then, BT and TalkTalk will run separately and keep competing. Leaving the deal aside, BT reconfirmed all of its full-year and longer-term guidance.
The shares rose 1.7% in early trading.
Our view
BT's move to rescue TalkTalk out of administration adds to the to-do list but doesn't change the case much. The cash cost of around £400mn this year looks manageable against the roughly £2bn free cash flow target, and it brings in 2.5mn customers. But TalkTalk is loss-making and a regulatory review is still to come, so any benefits will take time to show. Excluding the deal, BT reconfirmed all of its guidance.
The bigger story is a simpler, more UK-focused BT. The planned joint venture with Verizon takes the International division off centre stage, freeing up management time and capital for the UK. At home, the focus is on moving customers onto the new fibre and 5G networks, which are cheaper to run than legacy infrastructure. Fewer repairs are helping profits, and management is targeting a leaner workforce by the end of the decade.
The asset we're most excited about is Openreach, which builds and maintains the new fibre network. Full fibre is now available to 23.4mn premises, and around 9.4mn are connected, giving a take-up rate of roughly 40%, up 10 percentage points in three years. Further growth in connections will be key if the investment is to deliver attractive returns.
Line losses look to be stabilising, and slowing build activity and consolidation among smaller fibre rivals should make for a more rational market over time. But legacy lines are still a big part of the base, so Openreach needs to keep proving that fibre take-up can offset pressure from older services.
The Business division showed encouraging revenue momentum and a strong order book, but some of that upside is being reinvested in marketing, holding back profit. Structural changes and a competitive market still make this a tougher area to fix.
BT is a business in transition. With the heaviest phase of the fibre build nearly done, investment is set to fall and free cash flow is reaching an inflection point, with BT targeting around £2bn this year and around £3bn by the end of the decade. That's important for supporting shareholder returns, and should help chip away at our concerns around the stretched balance sheet.
The valuation has settled into a range above its long-term average, which we think is sustainable given the improving cash profile. BT remains our preferred name in the sector, but we don't see an obvious trigger for further expansion from here. Debt remains high, meaningful earnings growth could take time, and a loss-making TalkTalk adds execution risk just as BT needs to deliver on its cash promises.
Environmental, social and governance (ESG) risk
The telecom industry is low/medium in terms of ESG risk. Data privacy and security is the most significant risk driver, not only because customers are increasingly concerned about privacy, but also because cybersecurity breaches can be costly. Product quality is another key risk, particularly given the networks they manage are considered critical infrastructure. Carbon emissions, human capital and business ethics are also risks worth monitoring.
According to Sustainalytics, BT’s overall management of material ESG issues is strong.
BT follows strict security measures to protect personal data and has 3,600 cybersecurity employees. Greenhouse gas reduction policies are strong, including net zero alignment, emissions reduction coverage, audits and verification. BT scores well on board structure, shareholder rights, remuneration, audit and financial systems, and stakeholder governance.
BT key facts
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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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